Tax experts back calls to raise GST rate

Scrapping inefficient state taxes and increasing the goods and services tax take would improve productivity as well as states’ finances, tax experts say.

NSW Premier
Barry O’Farrell
, backed by South Australian Treasurer Jack Snelling, has called on the federal government to consider a higher rate or broader base of GST to help debt-ridden states struggling to fund services.

“There’s a case for both broadening and increasing the rate," University of Melbourne professor John Freebairn said.

Including fresh food, financial services, education and health in the GST could raise $19 billion in 2013-2014. Though some of the money should compensate the poor, it should also be used to get rid of inefficient state taxes, he said.

About 115 different taxes raise 10 per cent of the nation’s tax revenue, the Henry review of the tax system found. Many of the least efficient are levied by states.

Among the most pilloried are stamp duty on property transfers and insurance taxes. The latter carries a so-called welfare loss – the disincentive to work, invest or consume – of nearly 70¢ for each extra dollar raised. Conveyancing duty costs around half that. For GST, the estimate is less than 10¢.

Dr Freebairn said that seemed low, but even at a higher rate there were gains of up to 60¢ in the dollar. “That’s a wonderful handout for free," he said.

“It’s essentially a more productive economy [and] strikes me as one of the best productivity options we’ve got on offer – but it does involve challenging discussions between the Commonwealth and the states."

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The federal government has steadfastly ruled out any change in the GST rate or base.

GST expert Michael Evans, who helped craft the tax, said the rate should not be raised before broadening the base. “If you’re going to tax consumption as a base, you need to tax all of consumption."

That included health, education, financial services and food. “If you really give a Gonski, tax food – that gives you $6 billion," he said.

The exemption was introduced to ease the pain on poorer people. Mr Evans said that the rich benefited far more from it: “When they’re eating lobster and caviar and it’s tax free, it’s a bit hard to say it helps the poor."

University of NSW professor Neil Warren cautioned on taxing health and education, which have substantial government sectors, under the GST. That would require imputing to households the benefit they receive from governments and “a lot of churning" of payments.

Food was more straightforward.

“There’s no question that food should not be zero rated. There are far superior ways to compensate those affected," he said.

Australia’s 10 per cent GST rate compares with an Organisation of Economic Co-operation and Development average of 19 per cent and a global trend of rising consumption tax rates.